Egypt’s CDS, bond markets price in risk from tourism hit

LONDON: Egyptian debt-insurance costs surged to 18-month highs yesterday and dollar bond prices fell sharply as investors priced in the damage done to the country’s vital tourism industry by a Russian plane crash in Sinai that killed 224 people. Investigators are “90 percent sure” a noise heard in the final second of a cockpit recording was an explosion caused by a bomb, a member of the investigation team told Reuters on Sunday.

The British, German and Russian governments are evacuating their nationals from the country, a huge blow to tourism around the Red Sea resort of Sharm Al-Sheikh, one of the Egyptian economy’s few bright spots.

Five-year Egyptian credit default swaps traded at 383 basis points, up 12 bps from the previous close - the highest since April 2014. Tourism directly comprises 6 percent and indirectly 12 to 13 percent of Egypt’s economy. It had just started to recover after political turmoil sparked by the 2011 Arab Spring uprisings.

“The resulting loss in foreign currency revenues will place the country’s external position under added pressure and means that a further devaluation of the pound is looking increasingly likely,” Jason Tuvey, Middle East economist at Capital economics told clients. Tourist arrivals in Tunisia slumped 40 percent after the beachfront massacre of tourists earlier this year, Tuvey noted. A similar decline in Egypt could see export revenues - the category under which tourism receipts are counted - falling $3.5 billion, or 1.3 percent of GDP, in the coming year, he said. Egypt allowed the pound to depreciate on Oct. 23 to 7.83 per dollar from 7.73, a move that was needed to preserve dwindling reserves. But the currency is changing hands in the parallel market around 8.5 per dollar.

Hard currency reserves have dwindled to just over $16 billion, enough to cover just three months of imports. The dollar rose 1.6 percent against the pound in the six-month NDF market, putting the exchange rate at 9.55 . One-year NDFs quoted the pound at 10.5 per dollar, a move of 5 percent.

Egyptian dollar bonds also fell, with the 2020 and 2025 issues down around one cent on the day . Five- and 10-year treasuries were little changed at a local auction, however. The country is unlikely to default, since it can probably still count on Gulf allies such as Abu Dhabi and Kuwait for support, even if these countries are suffering the effects of lower oil prices. Cairo stocks lost 2.8 percent, adding to Sunday’s 2.6 percent fall. — Reuters